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You may recall that Bill Miller was the fund manager who enjoyed the unparalleled winning streak of beating the S&P 500 Index for fifteen consecutive years ending in 2005. Of course, investors who came late to this party severely regretted it as Miller’s benchmark-beating ability evaporated in a major way. Our friend Weston Wellington discusses this cautionary tale in this article.

When we saw the title of this Bloomberg article, “This Fund Manager Has Consistently Beaten the S&P 500 for 40 Years,” we naturally wondered if there was another Bill Miller that we had somehow missed. The subject of this article, Albert Nicholas, has run the Nicholas fund (NICSX) since 1969 which “has topped the Standard & Poor’s 500 Index by an average of 2 percentage points a year for the past 40 years and has beaten it every year since 2008.”

Digging a little deeper into these numbers, we see some difficulties. First, the positive alpha is entirely attributable to the first ten years of the forty year period. If we focus on the last thirty years, the average alpha drops to -0.6%. You can observe the concentration of high returns in the early years in this in the alpha chart below, which shows that even over the entire period of 44 calendar years, the observed alpha was not significant.

Second, while the S&P 500 is the fund’s prospectus benchmark, the Morningstar analyst-assigned benchmark (which is more reflective of the fund’s current holdings) is the Russell Mid-Cap Growth Index, which goes back 29 years. The fund’s average alpha over that period drops to -1.85%, and the length of the recent winning streak drops from seven years to four, as seen in the alpha chart below. For a further discussion of the problem of bad benchmarking, please see this article.

However, even this benchmark may not be appropriate for the whole period since the fund appears to have drastically changed its investment style over the years, as shown in the style drift chart below:

A measure of alpha that accounts for this change is produced by running a multiple regression based on the Fama/French Three-Factor Model. This resulted in a positive but not significant alpha of about 1.3%, and the indication of a definite tilt towards smaller companies, further invalidating the selection of the S&P 500 Index as the fund’s benchmark. The three-factor model accounted for 75% of the variation in the returns of the Nicholas Fund. The other 25% might be explained by foreign holdings (currently 9% of the portfolio) and concentrated positions.

To answer the question asked in the title, we can paraphrase 1988 Vice Presidential candidate Lloyd Bentsen in the famous debate with Dan Quayle, “Sir, you’re no Bill Miller.” However, considering how Bill Miller’s winning streak ended in tears, that is probably a good thing. The Bloomberg article applauded nine other funds alongside the Nicholas Fund based on the ridiculous criteria of 1, 3, and 5 year returns , so we prepared alpha charts on all of them against their Morningstar analyst-assigned benchmarks, and again found that none had significant alpha, and two of them even had negative alpha.

Just when we were about to give up hope on this article, we came across this insight from David Booth, the founder and co-CEO of Dimensional Fund Advisors who said, “Conventional active managers promised a lot they were not able to deliver.” His statement was reinforced by citing a Fama/French paper which “concluded that actively managed stock funds collectively return about the same as the stock market as a whole, minus the fees they charge.” That is precisely our argument against active management—that it has zero expected return (relative to an appropriate benchmark) before costs and negative expected return after costs.

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